Dos and Don’ts for traders to protect from big losses on Budget day

Traders are closely tracking the market ahead of the presentation of the full Union Budget 2024 on July 23.

Market participants are gearing up for the presentation of the full Union Budget 2024 on July 23, keenly observing its potential effects on the Indian economy and market dynamics.

Trading has gained heightened attention and interest as stock markets continue to reach new highs. The allure of quick additional income and the relatively small capital requirements are some of the factors driving this interest.

"The newcomers have not experienced all the cycles of the market and have only seen an upward trend since the COVID-19 fall. The recent election result day volatility was an example of how the markets react in case of a fall," said Jatin Gedia, Technical Research Analyst, Capital Market Strategy at Sharekhan.

Ahead of the Budget, Gedia shares some Dos and Don'ts for traders who are positioning for the event:

Secondary/Backup Trading Account
Traders should always keep a backup trading account in case there is a glitch with their primary account. If a glitch occurs, traders can take a counter position in the secondary account, thereby limiting potential losses in the primary account.

Hedged Positions
Event days bring volatility. Therefore, traders should always have hedged positions to counter intraday volatility. Psychologically, this helps maintain calmness as you are aware of the maximum potential loss beforehand, avoiding panic situations.

Proper Execution and Square-off
Hedge options strategies are one way to trade on an event day. However, it is crucial to ensure that all legs of the strategy are executed properly and squared off in full. If one leg of the options strategy is left open and the market moves against your view, it can result in a loss.

Avoid Counter-Trend Positions
Traders should take trades that align with the trend. For example, if markets are in an uptrend, long positions are advised. Taking counter-trend positions without confirmation of a trend reversal should be avoided. Instead, take a hedged position; if you have a long position, hedge it by buying a put option, and vice versa.

Index Options
Trading index options is advisable due to ample liquidity and the ability to diversify risk arising from announcements related to a particular sector. Keep both bullish and bearish strategies handy and execute them as the market trades in line with your outlook.

Stock Selection
Understand the impact of announcements related to a particular sector before taking a trade. For example, in the interim budget, the fiscal deficit numbers were better than expected. This information positively impacted PSU banks, hence taking long positions on PSU banks was a sound strategy.

Capital Preservation
There will be ample trading and investment opportunities, and the fear of missing out should not induce you to risk your entire capital on a particular trade. A stop-loss is essential to take advantage of the next opportunity that comes your way.

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